Question

evince textile recently made a large investment to upgrade its production facilities by sacrificing dividend payment to its shareholders . although these improvements wont have much of an impact on performance in short run, they are expected to reduce future costs significantly. what impact will this investment have on evince textiles earnings per share? what impact might this investment have on the company s intrinsic value and stock price?

Answer 1

Given that ,although these improvements will not have much of an impact on performance in the short run, they are expected to reduce future costs significantly. Savings in costs mean savings in cash ouflows, more productivity , more efficiency in operations --that will lead to more units produced at optimal costs, ie. economy in operations.

Volume of sales will increase , resulting in more net cash-revenues.

Natuarlly operating activities will be enhanced, ie. More working capital pumped in , incurring more receivables & payables , during the course of increased business.

When net income improves, earnings per share increases for the shareholders.

When cash flow within the company improves, it boosts the free cash flows available within the company, pushing up the intrinsic value of the stock , which is solely based on the positive happenings , inside the company, rather than the market reactions.

When intrinsic value picks up, there are more investors who look for such standard stocks . The whole lot of other investors , who regularly watch these value- investors--follow the pattern & create a demand   for these value-stocks, thus pushing up the stock prices.

Also, when earnings improve, due to retaining dividends, for use within the company, the investors sense that the company is expanding and is poised to earn more profits. That itself, pushes-up the stock price in the market.